Business not doing its share to keep Canada competitive

It was about 20 years ago — in October 1991 — that Michael Porter, Harvard University’s guru on competitiveness, issued a stinging report on Canada’s economic prospects.

It was about 20 years ago — in October 1991 — that Michael Porter, Harvard University’s guru on competitiveness, issued a stinging report on Canada’s economic prospects.

The report — Canada at the Crossroads — warned that Canada was far too dependent on the export of raw materials and foreign corporations. Canada, the Porter report said, needed to become much more innovative, to upgrade its resources with Canadian technologies, to develop a competitive machinery and equipment industry, and create many more Canadian multinationals.

Most importantly, the Porter report warned that Canada’s “most serious weakness” was its low productivity growth; since the early 1970s Canada had ranked near the bottom of all major industrial countries in productivity growth.

With its lack of innovation, Canada was “in many respects ill-equipped to respond to a rapidly changing competitive environment.”

And this was before the competitive threat from the BRICS — Brazil, Russia, India, China, South Africa — had emerged (Goldman Sachs did not introduce the acronym until 2001).

Despite all the steps successive government have taken — cutting corporate taxes, eliminating the capital tax, wiping out tariffs on machinery and equipment, providing generous tax incentives for investment in machinery and equipment, and providing many billions of dollars to boost the research capacity of universities — the innovation/productivity challenge remains.

But Canada’s most important technology-intensive multinational of 1991, Nortel, is no more.

Now comes the World Economic Forum, with its latest Global Competitiveness Report, which has downgraded Canada’s ranking from 10th to 12th place (it was ninth in 2009) because other countries are improving their competitiveness at a faster pace than Canada.

The problem doesn’t seem to be so much in government. The World Economic Forum praises Canada’s health and education policies as well as the quality of its institutions and their transparency, the health of the financial sector, and the efficiency of its labour and other markets.

Rather, business seems to be the source of Canada’s problems.

As the World Economic Forum rather gently put it, “as we have noticed in recent years, improving the sophistication and innovation potential of the private sector, with greater R&D spending and producing goods and services higher on the value chain, would enhance Canada’s competitiveness and productive potential going into the future.”

In other words, it is up to business to do a better job.

Yet, according to the World Economic Forum, Canada ranks 24th in business sophistication, with businesses showing a low capacity for innovation and a low level of spending on research and development. Canada also ranks 16th in technological readiness, with Canadian business being especially weak in its adoption of advanced technologies.

These are serious problems.

Yet, like 20 years ago, we still seem stuck as a commodity economy. Canada is pinning its future trade hopes on unprocessed natural resources, branding itself as an “energy superpower.”

The Keystone pipeline project, for example, is designed to ship raw oilsands crude to Texas, where it will be upgraded into commercial products — processing that should be done in Canada.

Moreover, development of the oilsands seems to depend on imported technologies; according to Gary Doer, our ambassador in Washington, more than 900 U.S. companies are providing equipment and supplies for oilsands plants.

Also on the horizon are major hydro-electric projects to help meet U.S. electricity needs.

But how much Canadian technology?

At the same time, many of our most promising potential multinationals are being scooped up by foreign purchasers — Tundra Semiconductor and DALSA are two of the most recent examples. Investment Canada has been so weakened that it can only intervene in the case of our largest corporations.

Canada is quite capable of creating innovative new companies — but weak in growing them into world-scale businesses.

As Andy Grove, a founder and past chairman of Intel, has stressed, “state-ups are a wonderful thing, but they cannot by themselves increase tech employment.

Equally important is what comes after that mythical moment of creation in the garage, as the technology goes from prototype to mass production.”

For many companies, that transition is known as the Valley of Death because it is so hard to finance, with the result that good ideas die.

But the need to create an innovation-led economy will become even more critical in the years ahead as our society ages. Unless we can create the high-productivity industries, producing high-value goods and services, Canada will be hard-pressed to sustain a high quality of life.

This should be our No. 1 economic priority.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.